Global Central Banks at a Crossroads: Will the 2022 Inflation Nightmare Return?

Source: 21st Century Business Herald Author: Wu Bin

In 2022, the supply gloom brought by the COVID-19 pandemic had not yet dissipated, when the Russia-Ukraine conflict suddenly erupted, and inflation shocks are still fresh in memory. Although price increases in major economies reached double digits at the time, institutions like the Federal Reserve and the European Central Bank once confidently believed in a “transient inflation” theory. Their delayed responses ultimately led to persistent high inflation, drawing widespread criticism of their policies.

Four years later, a similar scene is unfolding again. The Iran-U.S. conflict has caused oil prices to surge past $100, igniting a new inflation storm. About 20 central banks worldwide will hold monetary policy meetings this week, covering nearly two-thirds of the global economy. Among the G10 central banks, eight will be making rate decisions. With the Iran-U.S. conflict posing a fresh inflation threat, many central banks may be forced to delay rate cuts or even consider raising interest rates in certain cases.

However, policy adjustments are not yet urgent. Besides the Reserve Bank of Australia, which is expected to raise rates again, the Federal Reserve, the European Central Bank, and the Bank of England are likely to keep rates steady while assessing how soaring energy costs will impact consumer prices and economic growth. Future monetary policy will largely depend on how long the Middle East conflict persists. If the situation again pushes up prices, hampers economic growth, or causes sharp currency fluctuations, central banks are prepared to intervene at any time.

Will the 2022 inflation nightmare repeat this time? Will global central banks make the same mistakes again?

The Iran-U.S. Conflict Sparks a New Inflation Puzzle

Amid rising oil prices, the Federal Reserve, ECB, and Bank of Japan are set to announce their rate decisions this week, with investors closely watching for key signals.

Wu Qidi, director of the SourceDa Information Securities Research Institute, told the 21st Century Business Herald that under the backdrop of rising oil prices driven by the Iran-U.S. conflict, central banks face a dilemma between controlling inflation and maintaining growth. Currently, “data dependency” has become the common approach among major central banks. It is highly likely that they will keep rates unchanged this week, but their policy guidance may collectively shift to a “hawkish” stance, laying the groundwork for future tightening.

Market expectations are that the Fed will hold rates steady, but the outlook for rate cuts has shifted significantly. The dot plot may show only one rate cut this year, with officials assessing the risk of stagflation. The ECB is also likely to keep rates unchanged but may signal a hawkish stance to maintain market confidence in its inflation target, possibly raising rates once this year. The market expects the Bank of Japan to keep rates steady, but rising energy prices and imported inflation could accelerate its future rate hikes.

Dong Zhongyun, chief economist at AVIC Securities, analyzed that the ongoing Iran-U.S. conflict has driven a sharp surge in global oil prices and expectations. Brent crude has already broken through $100 per barrel, with futures remaining above that level. Just over two months ago, Brent was only $63 per barrel. The rapid increase in oil prices injects significant uncertainty into the already slowing global inflation trend.

More critically, the direct trigger for this round of oil price surge is Iran’s blockade of the Strait of Hormuz, with future shipping expectations depending on the geopolitical developments among the U.S., Iran, and Israel. The enormous geopolitical uncertainty, with the Strait’s closure duration as a transmission tool, makes the evolution of global inflation even harder to predict. Dong noted that since the conflict only started half a month ago, the actual inflation impact has yet to fully manifest. For major central banks, maintaining a “wait-and-see” approach until clearer inflation data emerges is a relatively rational choice.

Regarding the Fed, ECB, and BOJ, their situations differ.

For the Fed, Dong emphasizes that weak labor market data combined with rising oil prices make it difficult to achieve both inflation control and economic stability simultaneously. The key message this week will likely be extreme policy patience and a rebalancing of dual objectives. Powell may stress that the weak February non-farm payrolls require further observation to determine if it’s a trend, while the rising oil prices pose inflation risks. This signals a delay in rate cuts, with the Fed unlikely to consider rate hikes or comment on future hikes for now, trying to balance hawkish inflation concerns with dovish employment worries.

For the ECB, given its higher dependence on external energy and the fresh memory of the 2022 energy crisis triggered by the Russia-Ukraine conflict, the ECB’s signals are expected to be more hawkish than the Fed’s. If energy prices stay high, the ECB may further tighten its stance to counter inflation risks, possibly leaving room for future policy tightening.

For the Bank of Japan, rising oil prices pose a classic stagflation shock—higher import costs push up imported inflation, but soaring energy costs also damage economic growth and corporate profits. Dong predicts that the BOJ’s signals will be the most cautious and conflicted. On one hand, yen depreciation to 160 and the risk of runaway inflation due to imported costs suggest a need for hawkish rate hikes to stabilize the currency; on the other hand, aggressive hikes could trigger a fiscal crisis given Japan’s high government debt, and won’t solve supply-side energy shortages. The BOJ is expected to remain cautious, emphasizing that this inflation is a “temporary supply shock,” relying on government subsidies rather than monetary policy to offset energy costs, and warning against excessive yen depreciation.

Central Banks Seek a Path Amid Divergence

The Reserve Bank of Australia became the first major developed market bank to raise rates this year on February 17, leading Japan’s BOJ. On March 17, the RBA announced a 25 basis point hike to 4.10%, marking its second consecutive rate increase this year.

Wu Qidi told reporters that the RBA’s decision reflects the resilience of the Australian economy. Q4 2025 GDP grew by 2.6% year-on-year, exceeding the 2% potential growth rate; January CPI rose 3.8% YoY, above the target range of 2-3%. The labor market remains tight.

However, internal debates within the RBA are evident. The decision was narrowly passed 5-4, revealing deep divisions over economic outlook. Doves worry that excessive rate hikes could dampen already fragile consumption and growth. This suggests future rate hikes will be highly data-dependent, with possible policy swings based on incoming data.

Dong believes that Australia’s early rate hikes stem from its unique economic situation—unlike other major economies, which show demand slowdown after multiple hikes, Australia’s economy remains resilient. Its inflation is driven more by domestic demand, corporate investment, and a buoyant labor market than by imported energy prices. Therefore, the RBA’s rate hikes are driven by the need to address domestic inflation, with Middle East geopolitical events merely exacerbating this necessity rather than being the primary cause.

Markets expect the RBA to continue raising rates, while the BOJ and ECB may also hike this year. The Fed, however, is unlikely to do so, leading to a stark divergence in monetary policy outlooks.

Australia’s case highlights the current global divergence in central bank policies, rather than a simple hawkish vs. dovish split.

Dong emphasizes that for the Fed, without Australia’s economic resilience or the ECB’s urgency to combat imported inflation, it finds itself in a dilemma—either pause rate hikes or risk fueling inflation, caught between inflation risks and recession fears. It is a typical “data-dependent” central bank.

The ECB faces a different challenge: its economic outlook is weaker than the U.S., but it faces more direct energy shocks. If it is forced to hike during a slowdown due to imported inflation, it risks a stagflation scenario similar to 2022, but with a worse demand outlook.

The BOJ’s situation is the most fragmented. Yen depreciation to 160 worsens imported inflation, suggesting a need for rate hikes, but high government debt constrains aggressive tightening, risking fiscal crisis. The BOJ must balance currency stabilization and fiscal stability.

Fundamentally, Dong argues that the core reason for this divergence is that each country’s economy is at a different stage in responding to the same geopolitical shock.

Policy divergence stems from different economic structures. Wu notes that the divergence in outlook is rooted in the varying inflation pressures and growth drivers across economies. The Eurozone, as a net energy importer, is highly sensitive to oil shocks, increasing pressure to hike to curb inflation expectations. The Fed faces a “stagflation” dilemma—raising rates could worsen unemployment, while cutting could fuel inflation—thus it remains cautious, awaiting more data. Japan’s situation is dominated by rising energy prices and yen weakness, with rate hikes aimed at normalizing policy and easing currency depreciation.

Will the 2022 inflation nightmare return?

In 2022, the Russia-Ukraine conflict caused double-digit inflation in major economies. If the Iran-U.S. conflict persists longer, will the 2022 inflation nightmare reoccur?

Comparing the two, Dong sees similarities: both occur near critical turning points in monetary policy cycles—2022 at the start of tightening, now in the middle of easing; both are driven by energy supply shocks directly boosting inflation expectations.

However, the global economic contexts differ significantly. Dong notes that demand conditions are different: in 2022, the world was already overheating post-pandemic, with supply shocks amplifying inflation. Currently, global demand is not overheated but relatively weak, which suppresses supply-driven inflation transmission. Policy space also differs: in 2022, despite painful rate hikes, central banks had room to tighten further; now, after multiple cuts, they have less room to hike again. Lastly, policy coordination was more unified in 2022, with all central banks fighting high inflation together; today, their policies are highly divergent due to different economic cycles and external conditions.

Therefore, Dong believes the probability of a 2022-style inflation nightmare repeating is low. The more likely scenario is that major economies are stuck in a stagflation trap of wanting to hike but being unable to. However, if the Strait of Hormuz blockade extends beyond expectations and geopolitical tensions escalate, it could still trigger an outsized inflation shock—an important tail risk to monitor.

Wu Qidi also notes that compared to 2022, the macro environment has fundamentally changed, making a repeat of the inflation nightmare less likely.

The initial inflation environment was very different. Before 2022, pandemic-related supply chain disruptions and large U.S. fiscal stimulus pushed inflation to 40-year highs. Now, U.S. CPI growth has been on a downward trend since late 2025, with a very different starting point.

Energy’s role in inflation has also declined. Over recent years, service sector inflation has increased, and energy’s weight in the CPI basket has decreased. The energy transition has also reduced oil price elasticity. Past experiences have made central banks, especially the ECB, more cautious about energy-driven inflation, which will influence market expectations and policy actions.

Looking ahead, Wu warns that the key variable is the duration and intensity of the Iran-U.S. conflict. If it leads to a long-term blockade of the Strait of Hormuz, it could cause a severe energy supply crisis, raising inflation and constraining growth simultaneously. In such a scenario, central banks will face a more complex environment and difficult policy choices.

The misjudgment of “transient inflation” four years ago is still fresh in memory. As the world faces a crossroads again, can policymakers break free from past inertia and find a narrow path for a soft landing amid stagflation? The challenge is already here.

(Edited by: Wen Jing)

Keywords: Inflation